Monday, December 18, 2017

ETFs & How to Day Trade a Small Account Size

February 20, 2012 by  
Filed under Training

Do you have a small account size?  Do you have less than $25,000 required by the SEC to be a Day Trader in the United States?  Do you live outside the USA?  If yes, read on.  There is still a chance for you to Day Trade the United States Stock Markets.

As you may know, if you have less than $25,000 in your account, in the United States, SEC rules prohibit you from day trading.  In fact, with any account size less than $25k, you will only be allowed to make 3 day trades in a 5 day period.

Let me explain that.  If you buy any stock ticker on Monday and sell any portion that same day… that is considered a day trade.  If you do that again 2 more times on Monday… then you should NOT make any more day trades on Tues, Wed, Thur, or Fri.

You should wait until the following Monday to do so.  Please pay attention to this:  You don’t HAVE to wait until the following Monday.  You could make your 4th day trade… BUT… as soon as you do your broker will automatically freeze your account and require a conversation with you about the Pattern Day Trading rule.

If you do that a couple of times, your account will be permanently closed to any more trading.  You don’t want that.

So, what can you do?  Is there any way for someone who has less than $25,000 to actively day trade?

Yes, now there is.  I just found a broker in the Bahamas: SureTrader (a division of Swiss American Securites, Ltd) that allows investors to bypass the restrictions found within the United States.

Here is an article written by Benzinga: “SureTrader Sets Day Traders Free.”

Recently, I had one of my students open an account with just $3,000 and so far they seem to be legit.  I will also personally open a small account with them too so I can better report to you my experience.

NOW Pay Close Attention!!!

If you decide to open an account, and you are finally able to day trade, you need to do me one favor.  You must agree to NEVER risk more than $100 on any single trade!!!

With an account size that small if you don’t use proper risk management you could find yourself out of the game real fast.  Because they offer leverage of 2-1 or greater on a trade, you increase the potential reward, which is great, but recognize that it can also cut you faster… unless you promise to only risk a cut of $100 per trade.

Margin leverage is a great tool for day trading, but it’s a sure fire bet you will burn your account very quickly if you risk more than $100 per trade.  And under NO circumstance are you allowed to even consider swing trading or investing on margin.  Don’t even think about it!!!

I watched the movie “Margin Call” about a large investment bank imploding during the Financial mess of 2008.  If a company with that many years of experience and with that many Billions can just evaporate practically overnight, then it can happen to you.  Yes, the movie is fictional, but based on the very real Bear Stearns and Lehman Brothers failures.

Lesson: Do NOT use Margin if you are Swing Trading or Investing.  If the markets are closed, then there is simply no way for you to safely exit and control your losses.  If you are going to be using Margin to increase your risk, you better be in a position to control that risk.  Got it?  You better, otherwise you’ll learn the hard way.

Ok, with the warnings out of the way, let’s talk a bit about the good things that you can achieve using Margin in Day Trading.

Let’s talk about ETFs?  An ETF is an Exchange Traded Fund, and many of them are leveraged either 2x or 3x.  What does that mean.  Well, let’s take for example $TNA, Daily Small Cap Bull 3x Shares.  This ticker tracks the movement of the Russell 2000 index (which is an index of 2000 small capitalization stocks).  $TNA moves 3x (3 times) whatever the Russell 2000 index is doing that day!  If that index is UP 2% then $TNA will be up 3x that which would be 6%.  $TNA is a 3x BULL, which means if Russell goes up this goes up.  But if Russell goes down then $TNA goes down 3x as much.  Get it?  Good.

Why are we interested in these ETFs?  Because of the volatility provided by them being 2x or 3x the index they track.

One of my favorite ETFs lately has been the ticker $TVIX (VelocityShares Daily 2x VIX Short Term ETN).  $TVIX tracks the VIX, which is some weird volatility index of the market.  It doesn’t matter right now exactly what that is, what matters is that it is extremely volatile (which means the price changes a lot).  In fact, the best thing about $TVIX is that it is intra-day volatile.  Take a look at the chart below from this past Friday.

$TVIX opened up at $16.94, hit a high of $17.97 about 100 minutes later, before going back down most of the day and hitting a low of $16.66 around 3:30 pm.

Let’s do some math here.  From the open, it went up 6%… then from that high it went down 7.3%.  That is what volatility looks like.  Now, most naive observers of markets and non-players think volatility is bad, but this is exactly why I day trade: to take advantage of this volatility.  How?  In simple math: I risk losing 1% trying to make 3%.

The real reason Day Trading is so incredibly profitable for me (and consistently) is because every so often we will make 5%, or 10%, or even 20%+ on a single trade.

We talked about this in previous blog posts.  Think about that for a second.  Remember our coin flip analogy?  Assuming you have an equal chance of being right or wrong, wouldn’t you want to flip this coin as much as possible if every time you lost, you only lost 1%, but every time you won, you win 3%?  That is exactly Day Trading in a nut shell.

Correction: That is Profitable day trading.  Obviously most day traders do not adhere to those same risk/reward levels otherwise the failure rate would not be so high.

Can you imagine playing BlackJack, sitting at the $25 table, risking a loss of just $25 but winning 3x that when you win.  That is the winning table.  But most don’t play by those rules… and that is why they are guaranteed to lose… over time.

Ok, back to our ETF education.  Most of these ETFs are NOT marginable.  If you have just $30,000 in your account and it’s all CASH, meaning, you don’t have any stock positions, then you would only be allowed to use up to $30,000 toward the purchase of an ETF.

But SureTrader.com does let you use margin on some of them.  We have not yet tested all of them so I’ll have to report back to you on that, but we do know of one that is marginable.

$UVXY (ProShares Ultra VIX Short-Term Futures ETF).  It is exactly the same as $TVIX, just offered by a different company and is presently trading at almost a 1/3 the price… it closed at $6.60 on Friday.  This means that even with an account of $3,000, you would be able to buy 1,000 shares… I think my student trader was able to buy 2,000 shares with just that account size.

Holy cow right.  With intra-day volatility of over 5% and margin leverage of 3-1 can you imagine the potential gains by trading that?  Remember: this will ONLY work if you are absolutely, completely limiting the risk too.  It goes both ways.

Recap: If you have less than $25,000 and you are day trading, be sure to risk no more than $100 on any single trade.

Here’s a link to some of the ETF players.

Direxion ETFs

ProShares ETFs

IMPORTANT: ETFs are NOT EVER to be considered for Investing… For some reason, if you do a long-term chart, there seems to be a long term bias toward price degradation, probably because they are repriced every day.  Swing Trading is probably ok, as long as your definition of Swing is less than 8 weeks.

Be Safe.

Remzi